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Renewable energy strides ahead of fossil fuels, but how far can it go?
Written by Amy Saunders, Global Cement
25 March 2015
This week Beijing announced that it would close the last of its four largest coal-fired power plants, the China Huaneng Group Corp's 845MW power plant, in 2016. The four coal-fired plants will be replaced by four gas-fired plants with 2.6 times more electricity capacity than the former coal plants. China's policy makers are also encouraging increased use of hydroelectric power, solar and wind and is trying to restart its nuclear power programme.
In the same week, the Independent reported that Costa Rica had achieved a renewable energy milestone, having used 100% renewable energy for the preceding 75 days. The achievement was reportedly made possible by heavy rainfall, which powered four hydroelectric plants. Costa Rica has an impressive track record when it comes to energy sources. In 2014, 80% of its energy came from hydropower and 10% came from geothermal energy. In total, 94% of its energy requirements were met by renewable energy.
However, this week we also heard that Dangote is building the world's biggest oil refinery, which will process 650,000b/day. It will also be Nigeria's first oil refinery. Aliko Dangote, owner of Dangote Group, decided to up the initial design from 450,000b/day because he believes that Nigeria, as a leading producer of crude oil, should also be credited with local refining capacity. Currently, Nigeria produces crude oil, but has to buy refined products from abroad. The refinery is expected to be fully operational by 2017.
Efforts to increase renewable energy should be strongly encouraged - the benefits to the planet and its population are undeniable. However, renewable energy technology has a way to go (if ever) before it can entirely replace fossil fuel-derived energy, which makes Dangote's investment a safe bet. As renewable energy like solar and wind power is entirely reliant on nature, supplies can never be assured.
While sporadic supplies to houses and small businesses may be part of the price we eventually have to pay for a greener world, larger businesses like supermarkets and cement plants, which could lose millions (or billions) from power outages, will surely have something to say, and a lot of sway, when it comes to relying completely on renewable energy. In addition, power outages to essential services like hospitals are unthinkable when it comes to the health of our loved ones. Ultimately, the argument for relying on renewable energy may well be won by utilitarians' 'greater good' argument, but how would it feel to know that your sick child could have been saved by fossil fuel-derived energy?
Is the LafargeHolcim merger doomed?
Written by Global Cement staff
18 March 2015
In the UK there is an expression, coined by former Prime Minister Harold Wilson, that a 'week is a long time in politics.' While the week he was referring to has long since been forgotten, this refrain has since been repeated to the point of cliché by the mainstream media and is often used in the context of rapidly-changing political news stories. Regardless of its origin, this expression could well be used to accurately describe the current situation in France and Switzerland, where the past week has seen a number of serious and unpredictable developments in the preparation of the anticipated LafargeHolcim mega-merger.
Disgruntlement from 'those close to the deal' first surfaced as a 'wild rumour' a few weeks back but, in the past seven days, several of Holcim's shareholders, including the influential Thomas Schmidheiny, have questioned the contribution that can now be made by Lafarge. Holcim shareholders claim that the group has out-performed Lafarge in the 12 months since the deal was announced and they feel that this should be recognised financially. The abandonment of the Euro1.20 cap on the Swiss Franc by the Swiss National Bank (SNB) on 15 January 2015 has loaded the dice even further in Holcim's favour.
This is how the situation has deteriorated in the past seven days. Late last week, we had confirmation that Holcim was seeking to renegotiate the terms of the merger. On Monday we heard what at least part of those terms were, including an assertion that each Lafarge share was now worth just 0.875 of a Holcim share. Lafarge's main shareholders, accepting that their position was compromised to an extent, suggested that each Lafarge share was worth 0.93 of a Holcim share. Since then, it has become apparent that Bruno Lafont, the proposed leader of LafargeHolcim, has also put Holcim in a spin, as he is perceived to have presided over Lafarge's poorer performance.
Then, just yesterday, it was announced that the two current group boards had met separately in an attempt to arrive at new conditions with which to re-start negotiations. Commentators think that Holcim is holding all of the Aces but Lafarge has made it clear that it cannot accept a lower valuation and a CEO from Holcim. Discussions that take place 'in the dark' like this will do little to build confidence between the merging parties and infers that communication has become strained. There are twinges of antagonism in the releases that are not going to be solved by the boards sitting in separate rooms and whipping themselves into a frenzy.
Also caught up in this, like the child of a divorcing couple, is CRH. It only announced its purchase of Holcim and Lafarge divestments in February 2015. It stands to gain a joint Euro158m from Lafarge and Holcim if they fail to merge, but this will not make up for the loss of the many high-quality cement assets it otherwise stands to gain.
What will happen in the coming weeks? You have to be brave to predict how this will turn out, but our LinkedIn Group is a great place to discuss this rapidly-changing story. One thing we can be sure of is that there will be a lot to write about in another seven days. After all, a week is a long time in the cement industry!
HeidelbergCement expand presence in Sub-Saharan Africa… and other stories
Written by David Perilli, Global Cement
11 March 2015
HeidelbergCement has been reportedly showing interest in South Africa and Mozambique this week following the opening of new production capacity in West Africa. The Germany-based cement producer has beefed up its presence in the region with the inauguration of a 1.5Mt/yr clinker plant in in Togo and a 0.7Mt/yr grinding plant in neighbouring Burkina Faso. An additional 0.25Mt/yr grinding plant in the north of Togo is also planned for commissioning in late 2016. Other new projects in Africa include a new 0.8Mt/yr grinding plant in Tanzania that was commissioned in October 2014 and a new 0.8Mt/yr grinding mill at the Takoradi grinding plant in Ghana.
HeidelbergCement has repeatedly stated that it is considering production capacity expansions in other African countries. It currently operates in Ghana, Benin, Liberia, Tanzania, Sierra Leone, Togo, Burkina Faso and the Democratic Republic of Congo. Mostly it's a network of grinding plants with actual clinker producing plants in Tanzania, the Democratic Republic of Congo, Gabon and Togo. Its presence covers a band across central sub-Saharan Africa. Moving out of this zone into southern Africa would start to give HeidelbergCement a truly continental presence. However, from Dangote to PPC to Lafarge Africa other players are hard at work building their own cement empires.
The wild card here is how involved Chinese firms are in this process. Chinese companies like Jidong Development are building their own cement plants like the Mamba Cement plant in South Africa or Gweru in Zimbabwe, where upgrades are currently taking place. More commonly though Chinese companies like Sinoma are building new African cement plants such as a new PPC cement plant in the Democratic Republic of Congo or a new United Cement Company of Nigeria Limited (Unicem) cement line in Nigeria or several Dangote projects.
As part of the commissioning process for HeidelbergCement's new clinker plant in Togo, the Chengdu Design and Research Institute of Building Materials Industry (CDI, part of Sinoma) has emphasised that it will transfer the maintenance responsibility to local Togolese workers. The fact that the CDI's chairman made a point of saying this underlines tensions about both existing and changing international business influences in the region. Contrast this with the more sympathetic way in which Dangote's expansions in Africa that are portrayed by local media. Or look at this week's announcement by Egypt's ASEC Engineering and Management to help run a cement plant in Ethiopia. There is no need for calming statements from ASEC.
Finally, after all the discussion of the effect of oil prices on alternative fuels usage by cement producers it is worth noting what HeidelbergCement stated in its February 2015 trading statement. Principally, a drop in the price of oil is expected to present a positive impact on costs and market demand for the group. HeidelbergCement generates 86% of group earnings before interest, taxes, depreciation and amortisation (EBITDA) in net oil importing countries. In these places lower oil prices means potentially faster GDP growth and greater infrastructure spending. It is also worth considering the impact lower oil prices might have on the group's total oil and diesel bull of Euro250m/yr.
HeidelbergCement's full annual results for 2014 are due to be published on 19 March 2015. Maybe they will be more forthcoming about its intentions in Africa then.
Could the CRH / Lafarge / Holcim deals be scuppered? Depends on who you ask…
Written by Peter Edwards
04 March 2015
On the face of it this week's 'news' that CRH expects to receive the regulatory decisions it needs on its Euro6.5bn purchase of Lafarge and Holcim's joint divestments without significant delay is not particularly ground-breaking. However, the press release helpfully suggests that the deal will proceed according to CRH's desired outcome and only needs to be rubber-stamped. This is not strictly the case, with approval required in the EU, Philippines, Brazil, Canada and Serbia.
So... this story could just be incidental 'puffery' and the timing irrelevant. However, if read in the context of the letter concerning the acquisition from CRH Chairman Nicholas Hartery to company shareholders, it makes for a far more interesting read. Issued on 20 February 2015, the letter notifies shareholders of CRH's planned Extraordinary General Meeting (EGM) on 19 March 2015 and it starts fairly innocuously. The Chairman recommends that shareholders approve CRH's resolution to proceed with the acquisition of the LafargeHolcim assets. He describes the strong overlap between the divestments and CRH's existing portfolio, as well as the financial reasons behind the move. So far, as expected.
However, later in the document, the language gets fairly heated, bordering on bizarre in places. Hartery says that CRH has given 'hell or high-water' commitments to Lafarge and Holcim regarding the purchase This language indicates the importance of the deal to the board and possibly the level of personal involvement in the process to this point.
'What has CRH done?' we are supposed to ask. Are we led to believe that CRH has, in poker parlance, gone 'all in?' Any shareholders that are in doubt as to the board's position need look no further than the section concerning 'break fees.' If CRH backs away from the deal for any reason, for example by failing to approve the resolution at the EGM, the company will have to give a combined Euro158m to Lafarge and Holcim. This would be a sizeable headache and CRH can take no chances.
Returning to CRH's press release, its timing is even more intriguing when we consider reports out of Switzerland this week. Swiss newspaper Sonntagszeitung reports that Holcim has considered offering its shareholders a 'sweetener' to win their approval for the merger. It says that this could involve 'creative methods' to sway its shareholders into backing the deal, including a generous special dividend or a share buyback. The paper reports that Holcim is wary of not securing investor approval for a capital increase for financing, which is required for it to satisfy its side of the deal.
Holcim's actions may in turn be motivated by Reuters reports from 23 February 2015, which state that analysts have seen a potential divergence in earnings outlooks between Lafarge and Holcim as a potential 'spanner in the works' of the deal. This is in response to Lafarge's apparent poor performance relative to Holcim in the fourth quarter of 2014. Reuters even refers to analysts' rumblings that the terms of the whole mega-merger may be up for renegotiation in light of this.
CRH has said that it is prepared to move hell and high water to buy the LafargeHolcim divestments, but will it be able to if there is no LafargeHolcim from which to divest?
The full letter to CRH shareholders and associated information about the proposed CRH acquisition of Lafarge and Holcim's proposed divestments can be seen here.
Did LafargeHolcim overprice its sale to CRH?
Written by David Perilli, Global Cement
25 February 2015
One of the compelling issues to emerge from the Global CemFuels conference last week in Dubai was how alternative fuel (AF) use by cement producers might change while oil prices are low. Dirk Lechtenberg, of MVW Lechtenberg hinged his overview talk on both low energy prices and the on-going Lafarge-Holcim merger. The unspoken implication was that Holcim and Lafarge are offloading cement plants that use increasingly unprofitable AF. Cement plants are increasingly being out-bid for AF by energy-from-waste plants and 'gate fees' are dwindling accordingly.
Here's how it works. CRH is buying nine plants from Lafarge and Holcim in western Europe and five in eastern Europe. These are plants with high AF substitution rates. For example, Holcim's plants in France and Belgium have a substitution rate of 50% using around 250,000t/yr of waste fuels. Similarly, the Lafarge Zement Wössingen cement plant has permits for a 60% AF rate.
Globally, Lafarge and Holcim had substitution rates of 17.2% and 12.8% in 2013. CRH had a substitution rate of 21.2% in the same year. Post merger LafargeHolcim is estimated to have a substitution rate of below 10% in 2015. Meanwhile CRH is estimated to have a rate over 30%. After establishing this, Lechtenberg demonstrated how a thermal substitution model might be affected by fluctuating coal prices whilst using a refuse-derived fuels (RDF) rate of 35%. Put the price of coal below US$55/t and the savings of using RDF vanish.
Other delegates at the conference pointed out various limitations in Lechtenberg's methodology and figures. External legislation such as a carbon tax can disrupt this model for example. However, once coal becomes cheap and abundant enough it will displace most AF on economic grounds due to its high calorific value. Very few waste fuels can beat it.
At the time of writing the Brent crude oil price is just below US$60/barrel following a steep decline since mid-2014. The Australian coal price, the world's biggest export hub, has seen a steady fall since 2011 hitting just over US$60/t in January 2015. However, how interconnected are the oil and coal price?
This is difficult to link because bulk energy consumers switch supply according to price and other variables such as which fuels they can actually use. That last point is important in this discussion because preparing a cement plant to use AF requires an investment cost. Meanwhile, energy producers vary production depending on how much profit they want to make. Throw in new energy sources such as waste fuels and fracking and the overall picture becomes messy as all of these factors and others (OPEC policy, legislation etc) interact. Low oil prices do not necessarily mean low coal prices. For example, one analyst looking at BP's Statistical Review of World Energy in 2014 concluded that oil and coal consumption hold an inverse relationship to each other. When the proportion used of one rises, the proportion used of the other falls, and vice versa.
With all of this in mind there is ambiguity over whether CRH has been handed a time bomb in terms of its new cement plants' energy policies. Given that widely assumed production costs for the major oil producing nations are mostly above the current cost of crude oil, if the producers are controlling the price, then it seems likely that the price can't stay this low on a sustained basis. However, the cost of coal is on a five year low also. Is this the new normal or a market blip?
Cement plants using AF have a capital expenditure cushion against changing their fuels mix in the short to medium term but it can only last so long. The longer fossil fuel energy prices remain low the longer CRH will make less money from the fuel strategy it will inherit at its new plants.